Sterling steadied on Wednesday ahead of a speech by Bank of England (BoE) Governor Andrew Bailey to British lawmakers, with markets closely watching the testimony for clues on the path of monetary policy.

BoE chief Bailey and other top central bank officials will respond to questions from the Treasury Committee at 1415 GMT on the Financial Stability Report published on Dec 6.

"Any comment surrounding the outlook for inflation or interest rates could drive sterling," said Fiona Cincotta, Senior Financial Market Analyst at City Index.

Sterling edged 0.14% higher against the dollar at $1.2728. Against the euro, the pound flattened at 86.04 pence, after rising to an almost one-month high on Tuesday.

Supporting sterling, traders have cut back expectations of BoE rate cuts this year. Money markets are currently pricing in around 115 basis points (bps) of BoE rate cuts in 2024, compared with 140 bps last Thursday, according to money market pricing.

Francesco Pesole, FX strategist at ING, said he expected Bailey's tone on the future path of monetary policy to be in line with his words at the BoE's latest meeting.

The BoE said it expects to keep rates elevated for some time to ensure that the 2022 surge in inflation is well in the past.

"Bailey focused on pouring cold water on rate cut bets," he said.

Inflation in the UK fell more than expected in November to 3.9%, from 4.6% in October, but remains the highest in the G7 group of countries.

Bailey’s testimony comes ahead of a key reading on UK gross domestic product (GDP) due on Friday, which is expected to show the economy contracted by 0.1% in the three months to November.

Official data published last month suggested the UK economy could already be in a mild recession, but various business surveys last week suggested Britain's economy was more resilient than feared in December.

"We remain of the view that a deterioration in economic conditions in the UK will ultimately warrant substantial BoE rate cuts," Pesole said. ING expects 100 bps in BoE cuts in 2024.

 

(Reporting by Joice Alves; Editing by Christina Fincher)